According to the company, the Internal Revenue Service found after a five-year-long audit that the soft drink giant may owe the federal government $3.3 billion along with interest for the 2007 – 2009 period. The federal agency didn’t mention any penalties in the notice letter.
Coca-cola explained that the unpaid income taxes are linked to a transfer pricing procedure. Corporations that have offices in many parts of the world and do business there can relocate goods and services from one location to another.
In a perfect world, the transfers should be done at equal prices and costs, but in reality companies manipulate these costs to lower profits in high-tax countries and shift them to low-tax states to dodge hefty tax bills.
Companies’ favorite assets when trying to abuse transfer pricing are those related to intangible property including copyright, marketing and distribution know-how, licenses and so on. Unlike a production plant, intangible property assets can be freely transferred across the world without them having a fixed physical location. As a result, pricing can be easily manipulated for tax evasion purposes.
The IRS said that the beverage maker also abused transfer pricing when it failed to report all oversea income gained from intangible property. The company said that it used the same transfer pricing procedures it had agreed on with the IRS in 1996. And that agreement still stands as long as the company doesn’t change its transfer pricing policies which it didn’t.
The IRS also told Coca Cola that the issue reached the agency’s Chief Counsel and may soonhit a federal court. But the company said that it would rather discuss the matter with Chief Counsel before engaging in a legal battle.
Nevertheless, Coca-Cola stated that the IRS’ request lacks any basis and that it would use all administrative and judicial means to settle the issue. As a first step, the company plans to file a complaint with the U.S. Tax Court against the IRS’ resolution.
The company also announced that the current amount of debt plus interest rates shouldn’t affect its financial performance. Coca Cola disclosed that it has an emergency fund for such situations, and the fund is “adequate” for now.
But if the IRS raises stakes, the assessed tax and interest could affect its cash flow or financial position. Currently, Cola Cola holds the forth position in the World’s Most Valuable Brands list after Apple, Microsoft, and Google.
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